The shipping industry has been hammered.
The 250-year old Baltic Dry Index, a measure of global dry bulk shipping rates, dropped 94% to 663 points in the six-month period following May 2008 when it hit an all-time high of 11,793 points. Shippers far and wide saw charter rates, and by extension ship values, drop precipitously. This was the case at Singapore-based shipping trust Rickmers Maritime.
"Even though our vessels are on long-term fixed-rate charters with reliable, consistent and stable cash flows going out for a few years, banks only recognise charter-free market valuations in loan-to-value covenants," said Quah Ban Huat, chief financial officer of the trust. "From late 2008 onwards, container volumes fell in tandem with global consumer demand as the effects of the financial crisis set in. In 2009, container volume dropped 9.5%, marking the first recorded decline in container shipping."
"As a consequence, vessel valuations went down and we faced loan-to-value issues."
At end 2009, the trust's total outstanding loans stood at $773.8 million, an increase of 220% from 2007, as a result of taking delivery of vessels early last year. Total assets increased only 75% to $1.3 billion during this time.
As a shipping trust, Rickmers acquires, manages and operates container vessels on long-term charters for large shipping companies, for example Mitsui OSK Lines and CMA CGM. At the end of 2009, it owned 16 ships of which all but one was chartered through to at least 2013.
As credit became scarce, especially for shipping companies, Quah had to act fast. He drew down on the company's available facilities, increasing the amount of cash on the company's balance sheet by nearly 1,000% to $110.7 million at the end of 2009.
"When money was tight, we would rather have money on our balance sheet and in our bank account when it is required for capital expenditure," said Quah. He added that because of his experience in investment banking, he has always understood that "cash is king" when it comes to doing business.
Rickmers began renegotiating the terms of its outstanding debt in early 2009. It formed a finance committee to oversee the process this January and announced in April that the maturity dates of one of its loans due this spring had been extended for five years and the loan-to-value covenants for all of its loan facilities have been waived for up to three years. In exchange, the trust would repay $59 million towards its outstanding loans and the margins on all facilities will be set at 1.75% plus three-month Libor (London Inter Bank Offer Rate), an increase of between 0.55% to 1.05% above its existing rates, but allowing Quah the security of stability.
Now the trust -- and the entire shipping industry -- is looking forward to a decent recovery in container traffic. In the first quarter, the trust's charter revenue rose 14% to $37.2 million. Last Friday, the Baltic Dry closed at 4,078 points, having traded above 4,000 for the better part of the past month. And financial institutions have reported that trade confidence, especially in Asia, continues to improve.
As an example, Quah cited the redelivery of the Kathe Rickmers, which when it was first delivered in 2004 was chartered at a daily rate of $22,000; similarly sized vessels were commanding a rate as high as $35,000 by 2007. When Rickmers negotiated the new charter this March it was $8,500. Last month, the daily charter had recovered to more than $20,000.
"It's a cyclical business and since early this year we've seen a recovery in global container volume," said Quah. "In the first quarter of this year, people started trading again. Intra-Asia was strong, Asia-Europe was strong and volume went up in almost all sectors."
"We see opportunities out there, but for the next couple of months, we are focused on documenting and completing the restructuring of our loans," he concluded.
